In line with market expectations, the Reserve Bank of India (RBI) on Thursday kept its benchmark rate unchanged at 6.5% while announcing its third bi-monthly policy for the financial year 2023–24 (FY24), concluding a 3-day meeting.
The RBI expects inflation to rise in July and August on the back of a sharp rise in vegetable prices. The retail inflation gauged through the Consumer Price Index (CPI), exhibited a considerable deceleration to 4.3% in May 2023, the subsequent month of June witnessed a rise to 4.8%.
This increase can be primarily attributed to spike in tomato prices, as well as cereals and pulses. Nevertheless, considering historical patterns, the RBI expresses confidence in a substantial correction in vegetable prices moving forward.
In light of these developments, the RBI has made revisions to its CPI inflation projections for the fiscal year 2023–24. The central bank now expects inflation to be 5.4% for FY23–24 as compared to the earlier estimate of 5.10%.
It anticipates inflation to be approximately 6.2% in Q2, 5.7% in Q3, and 5.2% in Q4. Looking ahead to the first quarter of the fiscal year 2024–25, the RBI has set its inflation forecast at 5.2%.
"The MPC has delivered in line with market expectations on rates, stance and tone, with retention of rates and stance and the tone turning hawkish. The significant change is the upward revision in the FY24 CPI inflation projection from 5.1% to 5.4%. This means the high policy rates will remain high for long and, therefore, a rate cut can be expected only in Q1 FY25," said Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Markets reacted negatively in response to the RBI revision in inflation projections. Both the Indian benchmark indices, the Nifty 50 and Sensex were trading lower with a drop of 0.60% and 0.67%, respectively.
Among sectoral indices, Nifty Media was up by 1.05%, and Nifty Energy gained 0.43%. On the flip side, Nifty FMCG, Nifty Auto, Nifty IT, and Nifty Realty were trading in a negative zone with a drop between 0.10% and 0.60%.
During the first bi-monthly policy in April, the RBI made a surprising decision to keep its benchmark rate unchanged at 6.5% after delivering six consecutive hikes, that began in May last year and continued till February this year, pushing the repo rate to 6.5% with a 250-basis point hike.
Similarly, during the subsequent bi-monthly policy in June, the RBI maintained its benchmark rate at 6.5%.
On the global front, the US Federal Reserve raised its federal funds rate by 25 basis points to 5.25%–5.5% in July 2023, in line with market expectations. This move propelled borrowing costs to the highest level since January 2001.
In a parallel manner, the Bank of England, during its August 2023 meeting, increased its policy interest rate by 25 basis points to 5.25%. This marked the 14th consecutive rate hike, driving borrowing costs to new heights since 2008. The central bank's persistent actions are aimed at tackling high inflation, according to trading economics data.
Following suit, the European Central Bank raised interest rates by 25 basis points, continuing its trend of nine consecutive rate hikes. This decision was motivated by the belief that inflation would remain elevated for an extended period despite recent deceleration.
This brought the rate on main refinancing operations to 4.25%, the highest since October 2008, and the rate on the deposit facility to an over 22-year high of 3.75%.
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